With the end of the year approaching, it’s time to think about the details.
The year is wrapping up, and this is a crucial time to ensure that your tax situation is as advantageous as possible. Check out this list and see if you’re doing everything you can.
1. Deduct everything you can
This is a big one. You want the best deal on your taxes, and that means maximizing your deductions. For some folks, that might mean taking the standard deduction (which is looking very nice indeed after the Tax Cuts and Jobs Act of 2018). For others, adding up individual expenses for is the stronger move.
Either way, it’s something you want to check on before the end of the year.
Business expenses
For small business owners in particular, there’s a million little things you could be writing off as a deduction on your taxes. According to the IRS, business expenses must be both ordinary (common and accepted in your trade) and necessary (helpful and appropriate). That gives you quite a bit of room to save money.
Sure, there’s the more common options like advertising, marketing, rent, or office supplies. But are you considering expenses like your morning coffee or your phone bill? It doesn’t have to be on your business bank account. If you’re eating, drinking, sleeping, or thinking about your business, it’s a deduction.
Before the end of the year, check in with your CPA and make sure you’re writing off every business expense you can.
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📑Note: Some expenses have become harder to classify as business expenses after the Tax Cuts and Jobs Act.
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Charitable contributions
The holiday season at the end of the year is often a time of charity and giving, and it’s also a good idea to make sure you’re taking all the tax deductions you can . The timing of your donations can make a difference in your taxes, so consult with your CPA.
2. Think about your retirement funds
There’s a limit to how much you’re allowed to contribute to your 401(k) or other retirement funds within a given year. Have you thought about how much you want to put into that account?
It might be tempting to maximize your contribution, and in some situations that’s the right move. But for small business owners, the better strategy is often to take that money and put it into the growth of your business.
There are some tax savings that an owner/operator can find by contributing to a 401(k) or other retirement fund, especially if the business is structured as an S-corp. The company can contribute up to 25% of your W-2 to your retirement fund, but keep in mind you’d have to do that for any employees as well. Ask your CPA how to get the best tax deal for your situation.
3. Pull expenses into this year, push revenue into next year
This is another big one. Tax liability is largely based on income within a given year. The more expenses and the less revenue on your tax returns, the lower your tax liability.
That means now is the perfect time for any spending you were planning on doing for your business.
Look at the first quarter of next year. Are there any expenses coming up that you can cover now? If so, go ahead and do it. If you’re going to have to pay annual dues, subscriptions, or other expenses like that, cross them off the list before the end of the year.
Investing in your business
For small business owners, putting your money into your business delivers a one-two punch of tax savings and future revenue. Building a wide base now can bring you higher earnings later. And vehicles, office equipment, electronics, and other large investments don’t just increase your potential revenue for years to come, they also make great tax write offs. Cars and trucks, especially larger ones, have a particularly favorable effect on taxes.
You can even buy this stuff on credit (meaning a loan from a bank, not a credit card. The interest rate on a credit card is usually higher than the tax savings here) and get the write off now and pay the bill later.
| 📑Note: With the way tax law is structured, we’re talking about assets, not inventory. Inventory is non-deductible until you sell it. |
The key detail here: don’t just spend money to spend money. Savings are only savings if the stuff you’re buying makes sense for your business. Buying fifty pairs of jeans just because they’re on sale is not a money-saving strategy. Keeping the money is better than getting a great deal on something you don’t need.
Wait, what about lowering revenue?
We covered maximizing expenses, but what about minimizing revenue?
We don’t recommend focusing on that side of the equation. Tax savings are nice when you can get them but maintaining a healthy cash flow is essential to the health of your business. If you’ve got a few final invoices to send out at the end of the year, you can sometimes wait a few days to send them so the revenue shows up in the new year, but that’s a risky precedent to set with your clients.
Of course, everyone’s situation is different, so be sure to (you guessed it) work with your CPA to find the best strategy for you.
4. Stay on top of reporting requirements
Most small businesses are required to file certain reports to the state every year. The specifics differ depending on business structure, but some common things to keep in mind are:
- Income tax returns
- Annual reports
- Internal requirements (bylaws, operating agreements, etc)
But if you’re an S-corp owner there’s another reason to think about your reporting requirements before the end of the year. The cost of your healthcare plan is included with your income on your W-2 by default, but if you fill it out completely with the healthcare information, you can get a sizeable deduction.
Many payroll provider services also include a year-end checklist, so make sure you’re consulting that too.
5. Start early on figuring out your financials
You also don’t want to leave all the paperwork for the last minute. Before the end of the year, it’s a good idea to review your balance sheet, income statement, and other financial documents. If you’re rushing through your tax return, it’s easy to miss something in your books that could give you an opportunity to save. If you’re working with a professional, get them these documents as early as you can so they can find every deduction and have your taxes ready to be paid on time with no penalties.
And the earlier you file your taxes, the sooner you’ll get your refund.
Bottom line
Finishing up these last-minute details can help you minimize your tax bill, avoid legal tax trouble, and take full advantage of everything you can in a single year.
It’s a lot to think about, but you can simplify things by scheduling a call with a member of our team at DiMercurio Advisors. We’re experts at handling the details.
